The Relevance of ESG Investing in the 21st Century

di Claudia Pagliei, 

Content Creator V-Gen Finance

Nowadays, topics like environmental protection, respect for human rights, anti-corruption and bribery, and gender equality, are becoming increasingly important for both companies and investors as part of the wide framework of ESG (i.e. Environmental, Social and Governance).

From Profit to Prosperity: using ESG data for better investment decisions

The usual economic ideal of companies maximising their profits and creating value for their shareholders has been gradually replaced by a more sustainable long-term perspective which is now oriented towards different categories of stakeholders (not only investors but also employees, society, customers, governments, regulators, and so on). Even if the Brundtland Commission referred to sustainable development of global economies already 35 years ago (https://www.britannica.com/topic/Brundtland-Report), ESG data related to companies’ performances have become more central for investors only recently. As a matter of fact, ESG investing has been heavily impacted by several factors which are now the focus of global attention. Among the main ones: the growing awareness about climate change, the inability of the biosphere to absorb all the effects of human activities, the excessive consumption of natural resources, as well as the global pandemic outbreak that accelerated the use of new technologies and accentuated even further the already-existing income, gender, racial and age inequality. The growing sympathy towards ESG investments could also be explained by economic evidences showing how top ESG performers register higher and more stable return on capital, more satisfactory financial results, lower cost of capital and better overall risk management.

Towards Common Metrics for a more standardised ESG Evaluation

Impulses towards a more sustainable development are coming not only from the society itself but also from regulators and institutions. For instance, the European Union (EU) aims to be climate-neutral by 2050 as a result of the 2019 European Green Deal. An update of the Non-Financial Reporting Directive (Directive 2014/95/EU) will take place this year with the aim of driving all companies to disclose reliable and uniform informatio n about their ESG performance, allowing investors for a more objective comparability between them. Furthermore, the European Banking Authority (EBA) has recently issued some guidelines on loan origination and monitoring that involve ESG criteria. Last but not least, it is also interesting to recall the new framework launched by the Big Four accounting groups at the World Economic Forum in Davos this year in January in response to the investors’ growing interest for ESG topics. They proposed the disclosure of standardised corporate metrics (to be included in the Financial Statement) regarding non-financial aspects such as employment standards, environmental protection, corporate ethics, and other factors related to the UN’s sustainable development goals (SDGs). This proposal aims to achieve a universally-recognized way of reporting businesses’ sustainability and social impacts, and to attain consistency across different industries.

To sum up, we can say that for the first time different actors within the society have committed to work towards the joint vision of creating a better future for current generations. Of course, there is still an open debate on the actual feasibility of some goals and targets, but at least we are on the right path.